Rajat Gupta’s Insider Trading Conviction Affirmed

In a brief summary order issued yesterday, the Second Circuit denied Rajat Gupta’s collateral attack on his insider trading conviction in Gupta v. United States, Nos. 15-2707(L), 15-2712(C). In a decision reminiscent of the recent summary order in Whitman v. United States,the panel (Kearse, Wesley, Droney) passed on the opportunity to develop the law on the “personal benefit” element of insider trading and instead denied Gupta’s habeas petition on the primary ground that he procedurally defaulted by failing to raise the issue on direct appeal.

Gupta, a member of the board of directors of Goldman Sachs, was convicted of insider trading in 2012 based on evidence that he provided information about Goldman to Raj Rajaratnam, the founder of the Galleon Group, who traded on the information. That conviction was affirmed in March 2014, in an opinion authored by Judge Kearse, over Gupta’s arguments that wiretap evidence was improperly admitted at trial. United States v. Gupta, 747 F.3d 111 (2d Cir. 2014). A few months later in December 2014, the Second Circuit issued its decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), clarifying the law on the nature of the personal benefit required to sustain an insider trading conviction, only to have that rationale be rejected in part by the Supreme Court in Salman v. United States, 137 S. Ct. 420 (2016). Salman stuck to the formulation originally articulated by the Supreme Court in Dirksv. SEC, 463 U.S. 646 (1983), a seminal insider trading decision. In his direct appeal, Gupta did not dispute the jury instructions or weight of the evidence related to the personal benefit he received in exchange for providing insider information to Rajaratnam.

In affirming the denial of Gupta’s habeas petition, the Court’s primary rationale was that he failed to establish cause for not raising the personal benefit issue on direct appeal. The Court also found that Gupta failed to establish actual prejudice, which is also required for prevailing on a 2255 petition.

As to cause, the Second Circuit applied the same reasoning as Whitman to hold that there was no reason for Gupta’s failure to raise the personal benefit instruction or evidence on direct appeal—even though it been preserved through an objection made at trial, and where other defendants had raised the argument long before the decision in Newman gave it new life. The Court noted that while it was not bound by Whitman, a nonprecedential summary order, it would strive to decide like cases on the same grounds. This principle almost required the Court to affirm the denial of Gupta’s petition.

As to prejudice, the Second Circuit rejected Gupta’s argument that he was denied due process based on the district court’s jury instructions regarding personal benefit. The Court noted the jury instruction that a personal benefit could be based on “maintaining a good relationship with a frequent business partner,” implying a commercial benefit and not just a personal one. Relying on the 1983 Supreme Court decision in Dirks v. SEC—and largely bypassing its own more recent insider trading jurisprudence—the Second Circuit held that the trial court’s instruction was appropriate because it required the jury to find that Gupta gained a personal advantage, “such as a pecuniary gain or a reputational benefit that will translate into future earnings.” Dirks, 463 U.S. at 663. And, while Newman held that a personal benefit must be financial to be tangible, that interpretation was later rejected by the Supreme Court in Salman. Thus, there is no doubt that Gupta was convicted for conduct which was, in fact, criminal. The panel’s recent decision in United States v. Martoma, 894 F.3d 64 (2d Cir. 2018), amended and still decided over a spirited dissent, was mentioned only in passing, even though the decision was primarily about the subject of “personal benefit” and how to reconcile Newman and Salman.

Finally, the Second Circuit had little patience with Gupta’s argument that he was actually innocent. The court cited the “ample evidence” that Gupta and Rajaratnam were business associates and that Gupta intended Rajaratnam to trade on the basis of the material non-public information he provided. The Court gave two examples of Rajaratnam’s very profitable trades in Goldman shares shortly after calls with Gupta, and concluded that the jury could easily have found that Gupta anticipated that Rajaratnam—who ran Galleon, a successful hedge fund—would trade on the information and that Gupta would benefit financially from passing it along.

While insider trading law—and particularly the personal benefit element—has shifted in recent years, the Second Circuit appeared to view Gupta’s conviction as an uncomplicated case based on decades-old precedent (Dirks). As in Whitman, the Court sidestepped an opportunity to delve further into insider trading law, and instead used a summary order to apply settled procedural bases to deny Gupta’s collateral attack on his conviction. If the Court is to revisit the subject of personal benefit, it will happen in another case.